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Unit Title : Interpreting The Final Accounts
Calculate the following ratios for the business owned by David
1a.
Gross Profit Margin
Gross Profit x 100 15,000 x 100 = 50%
Sales Revenue 30,000
1b.
Net Profit Margin
Net Profit x 100 8,000 x 100 = 27%
Sales Revenue 30,000
1c.
Return On Capital Employed
Net Profit x 100 8,000 x 100 = 13%
Capital Employed 60,000
1d.
Give two examples of limitation
One limitation of using ratio analysis is that it doesnt take into account factors such as product quality or the level of customer service. It only looks at figures found in the final accounts.
This will not represent the total picture of a business. The are many factors which a business will need analysis of to operate successfully that ratio analysis does not cover. Another limitation of ratio analysis is that the figures from the final accounts may not be accurate which would lead to inaccurate analysis. Businesses may intentionally record figures inaccurately for many reasons such as to inflate numbers or defraud potential investors. An example being Tesco where high level employees knew figures were wrongly recorded making the company appear financially healthily (Wylie and Wardle, 2017).
1e.
Explain which business is better
Jane Enfields business appears better by looking at the accounting ratios provided. The reason being is her return on capital employed (roce) is higher by 7%, Janes being 20% compared to the 13% of Davids. The roce indicates the return (profit) made from a monetary investment in the form of a percentage (Cox and Fardon, 2010). This would show Jane is making more of a return from her money invested in her business compared to Davids investment making her business better. As she is more effective in using her assets to create profit.
Using the figure from Trading Account calculate the following
2a.
Rate of Stock Turnover
Opening Stock + Closing Stock = Average Stock 30,000 + 10,000 = 20,000
2 2
Average Stock x 365 = days 20,000 x 365 = 28 days or 13 times p.a.
Cost Of Sales 260,000
2b.
Mark-up
Gross Profit x 100 160,000 x 100 = 62%
Cost Of Sales 260,000
2c.
Specify the year, which has better performance. Give two reasons to support your selection
2d.
Make a recommendation to another department
Calculate the following ratios for 2015 and 2016
3a.
Return On Capital Employed
Net Profit x 100 12,000 x 100 = 10% (2015) 20,000 x 100 = 18% (2016)
Capital Employed 123,000 111,000
Gross Profit Margin
Gross Profit x 100 50,000 x 100 = 25% (2015) 70,000 x 100 = 25% (2016)
Sales Revenue 200,000 280,000
Net Profit Margin
Net Profit x 100 12,000 x 100 = 6% (2015) 20,000 x 100 = 7% (2016)
Sales Revenue 200,000 280,000
Stock Turnover
Opening Stock + Closing Stock = Average Stock 40,000 + 20,000 = 30,000 (2015)
2 2
40,000 + 30,000 = 35,000 (2016)
2
Average Stock x 365 = days 30,000 x 365 = 73 days (2015) 35,000 x 365 = 61 days (2016)
Cost Of Sales 150,000 210,000
3b.
State the possible reasons for and significance of any change in the ratios shown by your calculations
3c.
Relate the company performance to economic climate of the period
Calculate the following ratios for 2015
4a.
Return On Capital Employed
Net Profit x 100 50,000 x 100 = 5% (R Ltd) 58,000 x 100 = 9% (T Ltd)
Capital Employed 1,070,00 620,000
Current Ratio
Current Assets 1,250,000 = 3.86 (R Ltd) 687,000 = 7.63 (T Ltd)
Current Liabilities 324,000 90,000
Acid Test
Current Assets – Stock 1,250,000 – 490,000 = 2.35 (R Ltd) 687,000 – 240,000 = 4.97 (T Ltd)
Current Liabilities 324,000 90,000
Debtor Collection Period
Debtors x 365 days 680,000 x 365 days = 124 days (R Ltd)
Sales 2,000,000
320,000 x 365 days = 83 days (T Ltd)
1,400,000
Creditors Payment
Creditors x 365 324,000 x 365 days = 79 days (R Ltd)
Cost Of Sales 1,500,000
90,000 x 365 days = 37 days (T Ltd)
900,000
4b.
Identify a problem and give recommendations to a related department
5a.
Describe what this information indicates about the differences in approach between the two businesses.
5b.
Make a suggestion for future activities
Reference List
Wylie, C. and Wardle, S. (2017). Three former Tesco bosses have been accused of ‘cooking the books’ as a fraud trial begins. [online] The Independent. Available at: [Accessed 8 Mar. 2019].
Cox, D. and Fardon, M. (2010). AS accounting for AQA. 2nd ed. Worchester: Osborne Books Limited.
